Responsible Investment in Pooled Funds

Transcription

1 Responsible Investment in Pooled Funds Foundation 3rd edition I February 2013 EIRIS Foundation Charity Project

2 Acknowledgements This paper was updated by Will Reed-Wright. The author would like to thank all of the charity pooled fund managers who provided information for this guide. Thanks to Stephen Hine, Rachel Withey, Virginia Jennings and Mark Robertson of EIRIS. Thanks also to those from the Charity Commission, FSA and HM Treasury who gave their time and insight. The work of the Charity Project is kindly financially supported by the EIRIS Foundation. The Charity Project is very grateful to CCLA for funding the updating and printing of this version of the paper. 2

3 Responsible Investment in Pooled Funds Contents Executive Summary 4 Introduction What is responsible investment? Why choose responsible investment? What are the financial and legal implications of responsible investment? How to develop a responsible investment policy What are common investment funds (CIFs)? How this guide was constructed 11 2 Environmental, Social, Governance and Ethical issues Environment Human rights Labour standards and supply chains Tobacco Alcohol Gambling Military Pornography Animal testing Corporate governance 17 3 Responsible investment strategies Negative screens Positive screens Engagement and voting Integration 23 4 Other pooled funds 26 5 Conclusions 27 Appendix: Summary of CIF Charity Pooled Fund 30 POLICIES ON Responsible Investment 3

4 Executive summary Many charities invest in pooled funds specifically designed for charities. These can allow investors with a similar profile to pool investments and benefit from reduced costs and low minimum investment levels. This guide is designed to help trustees consider how their social, environmental or ethical concerns can be incorporated into their charity s investment choices and to help fund managers consider where there may be room for development and innovation to meet unmet needs. It also explores how well charity pooled funds cater for the increasing number of charities that are developing responsible investment policies. This guide outlines the policies of charity pooled funds in relation to environmental, social, governance (ESG) and ethical issues. The future regulation of Common Investment Funds (CIFs) the most common form of charity pooled fund is being reviewed; however at the time of going to print the Treasury has said that it intends that regulation will remain with the Charity Commission. In addition, the Charity Commission s guidance on charities investment (CC14), including ethical investment, has recently been reviewed. It is, therefore, a good moment to review current practice and look at opportunities for future development. 1 This guide provides details of fund managers policies regarding a range of factors related to ESG and ethical issues. In particular, the report highlights whether funds have negative and positive screens, or engagement, voting and integration strategies in their policies. Charity trustees may wish to further question individual funds on these points, as the policies of fund managers may vary greatly across the range of funds listed. For example, in terms of negative screening, one fund provider may screen out all military related investments, whereas another may only screen out those investments which derive more than 10% of their income from military products or activities. It is important for charity trustees to ensure they are aware of the details of any investment policy before making an investment. The term responsible investment (RI) refers to the incorporation of ESG or ethical issues into investment decisions and ownership practices. It is possible to invest responsibly whilst meeting the legal duties of trustees and without sacrificing financial returns. resources and events for charities, has facilitated greater awareness, debate and take-up of responsible investment from across the charity sector. A survey conducted by the Charity Finance Group (formerly Charity Finance Directors Group) and the EIRIS Foundation in early 2009 revealed that 60% of charities with investments over 1 million had an ethical investment policy. However, just 46% of all charities had such a policy. In an October 2012 follow up survey, conducted by the Charity Finance Group and EIRIS, the number of charities with an ethical investment policy had risen to 51%. However, for those larger charities with 1 million or more invested, this number had stagnated, with 59% of those surveyed having an ethical investment policy. This is despite the fact that in 2009, of those charities that did not invest ethically, 32% were planning to discuss the issue in the coming year. 2 There therefore appears to be a need for ongoing encouragement, advice and support for charities wishing to invest ethically, or those that are considering their investment approach. This guide is based on information obtained from forty-five UK pooled funds open only to charity investors. These funds offer investment opportunities in equities, cash, fixed interest, property and hedge fund asset classes. As pooled investment funds strive to cater for the needs and approaches of a variety of investors, individual investors have limited influence over the responsible investment strategies employed. It is therefore important that charities seek clear information on the responsible investment approaches of funds when deciding where to invest. Key findings By far the most common responsible investment issue considered by charity pooled funds is tobacco. This is screened out by twenty six funds. Sixteen of these funds go beyond this to employ other screens. These are predominantly negative screens and the focus and level of rigor varies. Since the second edition of this guide was produced in December 2009, there have been many developments in the responsible investment sector. The EIRIS Foundation Charity Project, which provides responsible investment

5 Responsible Investment in Pooled Funds Tobacco (considered by 26 funds) Military (15) Pornography (14) Gambling (12) Alcohol (9) Human Rights (7) Labour Standards and Supply Chains (5) Environment (4) Most funds consider corporate governance issues often as part of a policy that covers all of a fund manager s funds. Some funds also have an engagement and voting policy in relation to ESG and ethical issues. This is, in the main, in line with the engagement policy of the fund manager across all of the funds that they manage. Fourteen fund managers provided details of their policies in relation to ESG and ethical issues that apply to their charity funds. A charity may wish to question fund managers in more detail about their policies and practice in relation to engagement in order to assess how well this meets the charity s needs. Integration occurs when the fund manager includes potentially material ESG risks and opportunities into the normal investment analysis, stock weighting and/ or stock selection processes. There is growing evidence that the consideration of ESG factors in investment management and ownership processes is an astute financial decision and can be used to safeguard and enhance returns. Trustees may agree with this view and wish to ensure that their fund provider is taking account of ESG risks and opportunities in their investment decisions. The EIRIS Foundation s charity website provides independent listings of ethical or socially responsible investment funds and providers, as well as being a comprehensive resource on responsible investment issues for charities. As compared to the 2009 edition of this report, an increasing proportion of those fund managers included in our survey provided details of a clear responsible investment policy on engagement, voting or integration. Fund manager assessments have been produced by organisations such as ShareAction (formerly FairPensions) 3, and it is possible to see which fund managers are signatories to the UN-backed Principles for Responsible Investment (UNPRI). Signatories to the UNPRI commit to a series of voluntary and aspirational principles which provide a menu of possible actions for incorporating ESG issues into mainstream investment decision-making and ownership practices. As part of the European Commission Directive on Alternative Investment Funds, the Financial Services Authority s (FSA) successor, the Financial Conduct Authority (FCA), may change regulation relating to charity pooled funds in July However, at the time of going to print the Treasury has said that it intends that the Charity Commission will continue to regulate CIFs. The Charity Commission s CC14 guidance on the investment of charity funds was also recently reviewed. Changes in guidance on ethical investment and changes in the regulation of funds have further increased the scope for responsible investment by charity funds and brought further clarity to the limitations and opportunities that trustees have around responsible investment. Fund managers are only likely to develop new funds or adapt the policies of existing funds if they perceive that there is a demand from charities. Charities should therefore communicate clearly to fund managers and advisers if there are no charity pooled funds which meet their responsible investment objectives. Guide highlights there remains a limited choice of charity pooled funds with responsible investment criteria beyond tobacco screens. the funds with responsible investment criteria tend to be faith-based and focus on sin stocks such as alcohol, gambling and pornography. as compared to the 2009 edition of this report, a higher number of the fund managers included in our survey this time provided details of a clear policy on engagement, voting or integration. given its financial relevance, all charity investors should consider how their fund manager integrates ESG risks and opportunities into their investment decisions and ownership practices. trustees may want to encourage fund managers to be more transparent and explicit about their responsible investment policies and practices. public opinion suggests that charities face risks to their reputation and income if they are found to be investing in ways that are unethical, or contrary to their aims. looking to the future, there may be increasing demand for charity pooled funds with positive screens, or with a focus on mission and impact related investment. there may be latent demand for the development of more charity pooled funds that reflect current trends in responsible investment and focus on climate change, human rights and labour standards

6 1 introduction Charity pooled funds, such as Common Investment Funds (CIFs), are a central component of many charities investment approaches. This guide explores how well such funds cater for the increasing number of charities that are developing responsible investment policies. This guide has been prepared primarily for charity trustees. It is hoped that it will help trustees to consider how their social, environmental or ethical concerns can be incorporated into their charity s investment choices. The second edition of this guide was produced in 2009; since then there have been many developments in the responsible investment sector, including new initiatives, approaches and participants. The EIRIS Foundation provides responsible investment resources and events for charities, principally through CharitySRI.org, and also via YourEthicalMoney.org. Charitysri.org has facilitated greater interest, debate and takeup of responsible investment from across the charity sector. Since its launch in April 2006 the UN-backed Principles for Responsible Investment (UNPRI) has played an increasingly significant role in promoting good practice in the consideration of ESG issues in investment decisions and ownership practices. At the time of writing, over 1135 organisations, representing US $32 trillion in assets, have now signed up to the principles an indication of the growing recognition amongst mainstream investors that ESG issues can impact long- term financial value. 4 Total assets under management by UNPRI signatories now total an estimated 22% of the global investment market. 5 Increasing numbers of individuals and institutional investors are looking to invest responsibly. In June 2012 it was estimated that 11 billion was invested in green or ethical funds in the UK. 6 At the end of 2011 the wider SRI market in Europe reached 6.76 trillion euros. 7 Within the charity and foundation sector some discussion has focused on mission investment (meaning investment to meet social and environmental goals as well as financial goals). There are now more opportunities to invest in line with mission and more initiatives exist to increase the opportunities and appetite for mission investment. For example, Society Finance provides Social Impact Bonds, and Development Impact Bonds, in which social investors fully or partly pay for services to be delivered that improve social outcomes and the effectiveness of public sector spending. 8 Charities can also invest in the Charity Bank, for example, which operates with a mission to use finance exclusively for social purposes and it only lends to charities, social enterprises and community groups. 9 The Charity Commission updated its CC14 investment guidance for charities in This further clarified the legal and regulatory issues surrounding ethical, socially responsible or mission-related approaches to investment. Of those trustees who have not implemented an ethical investment approach, the most common reason cited for this was a fear of potentially lower financial returns from ethical investments. 10 Although trustees are rightly concerned about maximising financial returns, research (listed in section 1.3) now suggests there is little evidence that an ethical or socially responsible investment strategy can lead to lower returns. Since the second edition of this guide was produced the after-effects of the financial crisis and subsequent recession have hit the investment community. The slow rate of economic and financial growth has caused many investors to reflect on the longer-term risks that they may be exposed to and the ways that companies manage these risks. It has drawn attention to the role of shareholders as owners, and the significance of acting as responsible owners. The shareholder spring in 2012 saw increased shareholder activism related to executive pay and corporate governance. Similarly, the UK government s Kay Review of Equity Markets and Long-Term Decision Making of July 2012, focused on sound financial stewardship, increased engagement and a closer link between executive pay and performance. 11 The prominence of climate change as an issue that requires the urgent attention of governments, business, society and investors has also risen significantly in the last decade. Professor Lord Nicholas Stern, amongst many others, has warned that the economic consequences of not addressing climate change will be greater than those of the recent financial crisis. 12 There is a growing consensus that climate change will have financial implications for all companies and poses a systemic risk to investors. The World Economic Forum recently identified climate change risks as amongst the most likely to occur in the next decade. In its 2013 Global Risks Report, the World Economic Forum also highlighted the danger posed by potential clashes between the failure to adapt 4 See Principles for Responsible Investment website, 5 Principles for Responsible Investment Report on Progress 2011, available at Eurosif (2012) European SRI Study aspx Stern, N. (2006) Stern Review: The Economics of Climate Change 6

7 Responsible Investment in Pooled Funds to climate change and the unprecedented challenges faced in finance and economics. 13 Efforts to mitigate these risks are now in operation. For example, investor initiatives such as the CDP (formerly Carbon Disclosure Project) and Capital Markets Climate Change Initiative are working with companies to understand and address the impacts of climate change. Since the previous edition of this report in 2009, there have been many developments in the responsible investment sector and wider economy (from the increase in interest in responsible investment, to the CC14 guidance, the impact of the financial crisis and the increasingly-evident risks from climate change). It is against this changing landscape that we explore charity pooled funds in the third edition of this report. 1.1 What is Responsible Investment? The term responsible investment refers to the incorporation of environmental, social, governance (ESG) or ethical issues into investment decisions and ownership practices. The terms ethical, sustainable or socially responsible investment (SRI) can also be used for these investment strategies. Responsible investment can encompass a range of approaches. These can be used individually or in combination: Positive screening Positive screening involves investing in companies with a commitment to responsible business practices, that produce positive products and services or that address environmental or social challenges. It can be used to further the aims of your charity and to encourage responsible business practices. Forms of positive screening can include: Investing in companies that sell positive products for example, educational materials or essential necessities of life (e.g. food, clothing, electricity, water and housing). For a charity this could mean investing in schemes or companies that further the aims of the charity, or promote sustainable growth. For example, an environmental charity investing in sustainable energy resources. Thematic investing focused on specific ESG themes such as environmental technology or sustainable energy. A best-in-class approach favouring investments with best practice amongst sector peers. For example, an ethical fund might have criteria which enables it to invest in the Oil & Gas Sector, but only to invest in those oil companies which are best in their class as they have a better record on the environment and human rights than others in their sector. Negative screening Negative screening involves avoiding investments that do not meet certain ESG or ethical criteria. Forms of negative screening can include: Avoiding investments in certain companies or sectors. Setting materiality thresholds to determine which investments will be excluded for example, avoiding companies which derive more than 10% of turnover from gambling, rather than avoiding companies with any involvement in gambling. Avoiding the worst performing companies within a particular sector, for example those with the poorest human rights record. Engagement and voting Engagement is the process by which investors seek to maintain or improve corporate ESG or ethical policy, management or performance. Engagement can be used to encourage more responsible business practices. It usually takes the form of dialogue and/or meetings with companies or voting at Annual General Meetings (AGMs) and is typically carried out by fund managers on behalf of investors, although asset owner coalitions such as the Church Investors Group also engage directly. Voting is the process by which, as a shareholder, you have the opportunity to vote on a number of issues at company AGMs. Traditionally, shareholders have let fund managers decide on whether and how to vote, but voting is now increasingly seen as part of a shareholder s duty as a responsible owner. Awareness is growing of how voting can be used to influence companies. Voting can be used to communicate dissatisfaction to companies and the media. Integration Integration is the process by which fund managers include potentially material ESG and ethical risks and opportunities into normal investment analysis, stock weighting and/or stock selection processes. It is based on the premise that ESG criteria can have an impact on the financial bottom line in the long term. Sections two and three of this guide explore how managers of charity pooled funds may use a combination of these approaches. 13 World Economic Forum, (2013) Global Risks

8 1.2 Why choose responsible investment? There are a variety of reasons to adopt responsible investment. Outlined below are some of the reasons, accompanied by statistics from a 2011 Holly Hill & EIRIS survey into public opinion of charities investments. 14 Avoiding risks to your reputation: 78% of those surveyed agreed they would think worse of a charity if it had invested in activities contrary to its specific work and values. Charities may face a loss of prestige, public trust and support if their investments are found to be unethical. Concern about alienating supporters, beneficiaries and staff: 77% of those surveyed would think worse of a charity that had invested in activities with harmful impacts. If a charity were to find itself in this position it may lose funding, volunteer support and trust from its beneficiaries. Avoiding conflict with your charity s aims: 74% of those surveyed agreed that large charities should adopt ethical investment policies prohibiting investments in activities contrary to their work or values. Charities making investments, particularly large sums, can create sizeable impacts with their capital investment. It is important to ensure these impacts are positive, and that any negative impacts are mitigated. Using investments to further the work of your charity: 60% of those surveyed agreed charities should move some funds into mission investments if possible. Mission investments may allow charities to invest in projects that directly advance the cause of the charity, and potentially produce financial returns. Using investments to influence corporate behaviour: 71% of those surveyed agreed that large charities and their fund managers should be proactive shareholders, demanding high environmental and social responsibility from investments. Charities have a responsibility to be responsible shareholders, and to influence their fund managers and leverage their shareholder power effectively. Addressing financially-relevant ESG and ethical risks: companies with less exposure to risks to their reputation or earnings caused by ESG and ethical issues may be more financially stable investments. 1.3 What are the financial and legal implications of responsible investment? Legal issues Trustees are required to invest to further the purposes of the charity. This is usually seen as being achieved by seeking the best financial return from investments at an acceptable level of risk. The Charity Commission recognises that an ethical investment policy may be entirely consistent with this. [trustees should] have regard to other factors that will influence the level of return, such as the environmental and social impact of the companies invested in and the quality of their governance 15 The Charity Commission currently recognises three situations where the investment strategy can be governed by considerations other than level of investment return ethical investments. These are where: investment in a particular type of business would conflict with the charity s aims an investment might hamper its work, either by making potential beneficiaries unwilling to be helped because of the source of the charity s money, or by alienating supporters if an investment does not come into either of the previous two categories, trustees can accommodate the views of those who consider it to be inappropriate on moral grounds, provided that they are satisfied that this would not involve a risk of significant financial detriment. The Commission recognises that a charity may wish to influence a company both to ensure that its business is conducted in the charity s best financial interests and that its business does not conflict with the charity s responsible investment policy. The Charity Commission updated its ethical investment guidance (CC14) in October The Charity Commission noted that charities can engage in stakeholder activism, either through information requests, expression of views, or voting rights. Acting as a responsible owner: 69% of those surveyed agreed that large charities should formulate investment policies in consultation with their donors. Charities manage assets donated to them and they may therefore wish to consider investing in a manner that mirrors the aims and beliefs of supporters and stakeholders Charity commission (2011) Charities and Investment matters: A guide for trustees, p.4 8

9 Responsible Investment in Pooled Funds investment managers should vote and engage with the company management as a matter of course 16 The Charity Commission noted that charities can also invest in Programme Related Investment (PRI). This type of investment is aimed at furthering the charity s aims in a way that may produce a financial return. As the justification for the investment differs from a purely financial investment, the Charity Commission states that PRI are not bound by the principles or law for investment, so long as the trustee has fulfilled their duties by: showing the PRI is wholly in furtherance of the charity s aims making sure that any benefit to private individuals is necessary, reasonable and in the interest of the charity considering reasonable and practical ways to exit the PRI if it no longer furthers the charity s aims Charities may also consider making mixed motive investments. These are investments that combine elements of financial and programme related investment, but cannot be wholly justified by either. If trustees chose to make this type of investment, they must exercise the same duties as with a PRI, and ensure that the investment is justified by the combination of financial returns and furthering the charity s aims, whilst ensuring that any private benefit that may arise is appropriate. 17 A study by leading international law firm Freshfields Bruckhaus Deringer, for the United Nations Environment Programme s Finance Initiative (UNEP FI), also considered the legal implications of integrating ESG considerations into investment decisions. The study was primarily focused on pension funds but its findings are relevant for all longterm institutional investors, including foundations and charities. In the firm s legal opinion, it may be a breach of fiduciary duties to fail to take account of ESG considerations that are relevant and to give them appropriate weight, bearing in mind that some important economic analysts and leading financial institutions are satisfied that a strong link between good ESG performance and good financial performance exists. Freshfields also states that, we think there is a strong argument that there will be a class of investments that could reasonably be assumed offensive to the average beneficiary such that they could lawfully be excluded from an investment portfolio without all the beneficiaries express consent. That class of investments will not be fixed and a conservative approach is advisable, but the types of investment that might fall into that class include investments that are linked to clear breaches of widely recognised norms, such as international conventions on human rights, labour conditions, tackling corruption and environmental protection. 18 A 2009 sequel to the report extends the legal arguments for ESG responsibility and provides a legal roadmap for fiduciaries looking for concrete steps to operationalise their commitment to responsible investment. It also asserts that institutional investment consultants and fund managers face a very real risk of being sued for negligence if they are not proactive in incorporating ESG factors into legal contracts with clients. The report highlights commentary from Lord McKenzie during the passage of the UK Pensions Bill in 2008 stating that there was no reason in law why trustees could not consider social and moral criteria in addition to their usual criteria of financial returns, security and diversification. 19 In addition, in 2010 the Financial Reporting Council (FRC) set up The UK Stewardship Code, which focuses on engagement between institutional investors and companies to advance long-term returns to shareholders and efficient exercise of governance responsibilities. The Code includes good practice on engagement with investee companies which institutional investors can work toward. The Code operates on a comply or explain basis. The FSA requires UK authorised asset managers to report on whether or not they apply the Code. More recently the UK government s Kay Review of UK Equity Markets and Long-Term Decision Making in July 2012, noted that asset managers have a responsibility not only to meet their fiduciary duties but to meet common standards of ethics and decency. 20 Organisations such as Tomorrow s Company, in association with UNEP FI, have made the case that future regulation, both globally and in the UK, can further encourage responsible investment, and are working to ensure that dialogue between investors, asset managers and policymakers encourages this. 21 Financial returns All charities will be concerned that their investments provide good financial returns. There are now many years of practical experience that demonstrate that ethical funds need not underperform. In fact a well-managed, balanced ethical portfolio can outperform its non-ethical peers. The degree to which a particular responsible investment approach has a beneficial or a detrimental impact on performance will primarily rest with the skill of the fund manager and their team and in particular, their stock selection abilities. There is a long history of studies of responsible investment and financial performance indicating the positive benefits of responsible investment, including: 16 Charity Commission (2011), Charities and Investment Matters: A guide for trustees p Freshfields Bruckhaus Deringer (2005) A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment (UNEP Finance Initiative). 19 Asset Management Working group of the UNEP FI (2009) Fiduciary Responsibility Legal and Practical Aspects of Integrating Environmental, Social and Governance Issues into Institutional Investment See for further details 9

10 Margolis and Walsh synthesised eighty studies on SRI portfolios, and found that more than 50% of the studies indicated a positive link between CSR practice by companies and SRI fund performance. 5% of these studies showed a negative link, whilst the remainder failed to evidence the link. Thus, the conclusions testify largely to a neutral or positive link. 22 An analysis of fifty two quantitative studies produced over thirty years, by the University of Sydney found a statistically significant association between corporate social performance and financial performance exists, which varies from highly positive to modestly positive. 23 A 2008 survey conducted by independent investment consultants Jewson Associates reported that investment in ethical funds does not automatically lead to poor performance. The survey, commissioned by Oxford University, found that SRI funds can perform better than non-sri funds, but levels of volatility or risk may be higher. The review compared UK, US, European and global equity SRI funds with non-sri funds over a ten year period. 24 In 2007, UNEP FI and Mercer reviewed academic and broker research on the relationship between ESG factors and portfolio performance of twenty academic studies. It found evidence of a positive relationship in half of these, with seven reporting a neutral effect and three a negative association. The study also comments we are already seeing evidence of materiality in the returns that ESG integrated strategies are producing amongst practitioners (as evidenced by the broker studies also reviewed in this report). 25 In 2011, a study by Hoepner, Rezec & Siegl found that pension funds integrating corporate environmental responsibility ratings had no detrimental financial effects. 26 In 2011 the UNEP FI and Mercer report was updated by a report from the Stockholm School of Economics. Reviewing a further twenty one studies, the report found a slight tendency toward positive performance for SRI funds as compared to conventional funds. 27 A 2012 study by experts from the London Business School, Boston College and Temple University found that institutional investors who successfully engaged with companies on sustainability issues experienced a higher level of return, particularly in the year after engagement. 28 A focus on ESG issues can enhance understanding of how companies are likely to adapt, excel or suffer in a changing context. The inclusion of ESG factors in investment analysis can help to mitigate risks and take advantage of opportunities, and thus can have an impact on financial performance. The UNEP FI Asset management Working Group commissioned a study into the links between ESG issues, financial value and company profitability. The study concluded: 1) ESG issues are material there is robust evidence that ESG issues affect shareholder value in both the short and long term. 2) The impact of ESG issues on share price can be valued and quantified. 29 In addition, a 2012 study by Deutsche Bank Climate Change Group found that those companies with better Corporate Social Responsibility (CSR) performance had lower levels of risk in all cases, and exhibited neutral or positive performance as compared to the wider market How to develop a responsible investment policy Any charity wishing to align their investments and mission and looking to consider ESG and ethical issues in their investment decisions, should have a responsible investment policy. Developing a policy enables trustees to agree and articulate the motivation for investing responsibly, the ESG and ethical issues they wish to address and their preferred approach to positive and negative screening, engagement, voting and integration. Advisers, research providers and investment managers can help charities to ensure that their policy is realistic and implementable. A pragmatic approach may be needed, particularly if the charity is investing in pooled funds. Further guidance on the process of developing and implementing a policy and on the selection of funds and fund managers can be found at: downloads/key_publications/toolkit_for_charity_trustees. pdf and at YourEthicalMoney.org. 22 Margolis, J. D. and Walsh, J. P., (2001) People and profits? The search for a link between a company s social and financial performance 23 Orlitzky, M., (University of Sydney) and Schmidt, F., and Rynes, S., (University of Iowa). (2003) Corporate Social and Financial Performance 24 Jewson Associates, (2008), An SRI paper 25 United Nations Environment Programme Finance Initiative and Mercer (2007) Demystifying responsible investment performance: A review of key academic and broker research on ESG factors 26 Hoepner, A., Rezec, M & Siegl, S., (University of St Andrews), (2011), Does pension funds fiduciary duty prohibit the integration of environmental responsibility criteria in investment processes? 27 Sjostrom, E. (2011), The Performance of Socially Responsible Investment: A review of scholarly studies published Kurtz, L.,(2012) Moskowitz Winner 2012: The Benefits of CSR Engagement 29 UNEP Finance Initiative Asset Management Working Group, (2006) Show me the money: linking Environmental, Social and Governance Issues to company value 30 Fulton, M., Kahn B. M. & Sharples C, (2012) Sustainable Investing: Establishing Long-Term Value and Performance 10

11 Responsible Investment in Pooled Funds As with other parts of the investment process, many trustees delegate responsible investment to fund managers. Therefore the transparency of fund managers and clear mandates are important trustees are not necessarily expected to become complete experts in responsible investment. 1.5 What are Common Investment Funds (CIFs)? CIFs, constituted as charities in their own right, are pooled investment vehicles similar to unit trusts specifically set up for charities. Charities in the UK can invest in CIFs, which offer investment opportunities in equities, cash, fixed interest, property and hedge fund asset classes. CIFs have proved to be popular investment vehicles for charities. At present, there are forty five CIFs managing at least 8.2 billion of charity assets. 31 The advantages of investing in CIFs include: they qualify for the charitable exemptions from income tax and capital gains tax they are exempt from stamp duty on the purchase of UK equities they provide diversification to reduce risk minimum investment levels are low they allow charities to invest together with other charities with similar risk profiles and income requirements they are administratively simple as they are able to distribute income gross of tax where applicable (avoiding the need to make a reclaim) Many charities also invest through other forms of pooled funds, such as OEICs and unit trusts, which are not specifically for charities. Whilst these funds do not provide the same tax relief as CIFs, they can give access to a wide range of cost effective investment choices which also provide diversification and reduce risk. 32 Whilst CIFs are currently regulated by the Charity Commission it should be noted that this does not mean the Charity Commission makes any judgement on the acceptability of risk or performance and it is not a kitemark of quality. Charities must take proper advice when making investments. The rules on charities and responsible investment discussed above (see section 1.3) equally apply to CIFs. The trustees of a CIF have a duty to ensure that any responsible investment policy is consistent with the above principles (and their general duties as trustees). Likewise the trustees of any charity investing in that CIF would have the same duty. At present the Charity Commission regulates CIFs, as registered charities. In doing so, the Charity Commission requires CIFs to be administered and managed by a fund manager and trustee who are authorised by the Financial Services Authority (FSA) and independent of one another. In June 2011, the European Commission (EC) reached agreement on its Directive for Alternative Investment Funds (AIFMD). This agreement covers many areas of financial investment, and may have an impact on the future regulation of CIFs. At present the Government and FSA are undergoing consultations with stakeholders on the new Directive. One element of change under the Directive is that regulation of CIFs could potentially be transferred to the body due to replace the FSA in April 2013, the Financial Conduct Authority (FCA), although the Treasury has stated that it intends to maintain the current regulators at the present time. Even if this change does not occur, there are likely to be changes to the requirements placed on CIFs when AIFMD is implemented. To keep up to date on this consultation please refer to How this guide was constructed The Charity Commission kindly provided a current list of active CIFs. For this guide, we contacted all of the providers of the forty five CIFs to ask for information about their funds, particularly information on any responsible investment approach. Some fund managers also provide a variety of other funds that cater specifically for charities and their ethical and responsible investment requirements. For example, CAF s Socially Responsible Portfolio screens out a wide variety of issues and Sarasin provides a range of charity specific funds with a range of investment criteria, such as the UK Equity Fund. Whilst these funds do not provide the range of tax benefits that CIFs provide, they may also be of interest to charity trustees. There are many other options, including, but not limited to: Epworth s Affirmative Common Deposit Fund for charities, Newton s SRI Fund for Charities and Ecclesiastical s Amity Charity funds. Further information can be found at CharitySRI.org. Information was obtained on forty two, with three funds declining to provide information. Before this guide was published, each fund manager was given an opportunity to comment on the information regarding their funds It should be noted that this paper does not represent an endorsement of CIFs over any other type of investment. 11

12 2 Environmental, social and ethical issues Pooled investment funds strive to cater for the needs and approaches of a variety of investors. Individual investors may have limited influence over the responsible investment strategies employed. It is therefore important that charities seek sufficient information from fund managers to make an informed and balanced judgement on whether the responsible investment policy of a pooled fund meets trustee expectations. ESG and ethical issues can be considered by fund managers through positive and negative screens, engagement and integration. This section looks at the most common ESG and ethical issues that are explicitly part of the responsible investment strategy of numerous charity pooled funds. Whilst there is a focus on traditional negative screening issues, there is a recognition that broader environmental and social challenges can affect corporate financial performance as well as being integrally linked to the mission of many charities and foundations. 2.1 Environment the issue The environment is a very broad issue, encompassing a variety of factors and activities including, but not limited to: environmental management, policy, reporting and performance chemicals of concern climate change and greenhouse gases nuclear power sustainable timber water resource scarcity & pollution As highlighted earlier, the implications of climate change will be relevant for all investors and all companies. Factors such as regulation, licence to operate, the price of energy and carbon trading schemes, changing weather patterns and the resulting impact on resources, reputational issues, as well as the cost (and opportunity) of the transition to a post-carbon economy all serve to underline the substantial financial relevance of climate change for investors. It is therefore surprising that few charity pooled funds mention climate change in their investment policy, and that there are no funds that have added this issue to their investment policy since How fund managers may incorporate the issue into investments It is possible to use positive screening, negative screening and engagement approaches in relation to environmental issues. If a fund manager is approaching responsible investment from the perspective of ESG or ethical risk management, it is likely to pay particular attention to companies which have a high exposure to this area and to seek to understand how these companies will manage and mitigate the resulting risks in order to better safeguard longer-term investments. Funds with an environment screen CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Fixed Interest Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Investment Fund In addition, the CCLA funds will focus on climate change disclosure in their engagement approach and failed engagement will lead to divestment from The CCLA Charities Property Fund undertakes environmental impact assessments on its properties and has environmental clauses within leases. biodiversity Its relevance for charities Environmental issues are likely to be of relevance to all charities especially as companies that have a poor record of environmental management or performance could be a riskier investment financially and/or subject to future litigation. Such companies may not be well placed to deal with the environmental challenges facing them and the planet. The issue is of particular concern to environmental, wildlife and conservation charities. 12

13 Responsible Investment in Pooled Funds 2.2 Human Rights The issue Human rights have become central to the corporate social responsibility agenda over the last few years. This is partly driven by the debate about whether globalisation is detrimental or beneficial for developing countries. It is also partly driven by concern about whether corporate behaviour is reinforcing or undermining human rights. A number of campaigns focusing on corporate behaviour, most recently in Burma, have placed the spotlight on particular countries where human rights are seen as most at risk (whilst not detracting from the fact that violations of human rights may occur in all countries). While governments have primary responsibility to promote and protect human rights, corporations and other organs of society also have responsibilities. Companies are increasingly assessed on their wider impact on fundamental human rights in their operations in countries where oppressive regimes, weak governance and conflict hold sway. Some investors have traditionally boycotted certain countries on this basis. Others, however, have argued that countries need investment to improve basic social and economic rights. Increasingly, it is what the company does in a country that is of interest. Its relevance for charities Allegations of human rights abuses can potentially damage a company s reputation and financial returns so all charities may want to be sure that such companies have appropriately managed these risks. This issue may be of particular interest to charities working in the areas of international development, aid and human rights, as well as to religious groups. How fund managers may incorporate the issue into investments Assessing a company s performance on human rights issues is not always straightforward. It is possible to avoid investing in or engaging with companies that poorly manage the risks associated with: Some fund managers adopt a best in class approach to the issue, investing in companies with the best record on human rights issues within their sector or geographic area. Funds with a human rights screen CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Fixed Interest Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Investment Fund Epworth Affirmative Equity Fund for Charities Epworth Affirmative Fixed Interest Fund for Charities Epworth Affirmative Corporate Bond Fund for Charities In addition, the CCLA COIF Ethical Investment Fund, CCLA COIF Charities Fixed Interest Fund, CCLA COIF Charities Global Equity Income Fund and CCLA COIF Charities Investment Fund have a focus on violations of international conventions and norms in the area of human rights in their engagement approach. Failed engagement leads to divestment from Labour standards and supply chains The issue The quality of working conditions and the use of child labour in global supply chains is a high profile issue. An ever growing number of products are being assembled or processed in multiple countries. More attention is being paid to the working conditions prevalent in developing countries and/or those with poor human rights records. These countries may be less able, due to factors including lack of resources, to ensure that basic minimum standards are maintained in all workplaces. Whilst many cases of abuse and exploitative conditions have been located in poorer countries, it is also widely acknowledged that trade and foreign investment generate far more employment and wealth in developing countries than is provided by foreign aid projects. Hence, many development organisations consider it vital to ensure that raising concerns about working conditions does not unduly undermine such benefits or lead to back door protectionism by wealthy countries. operating in countries with oppressive regimes or specific countries such as North Korea operating in such countries but with insufficient human rights policies and systems companies that have been the subject of allegations of breaches of human rights principles companies that have been the subject of allegations of breaches of international labour standards John Ruggie, the former UN Special Representative of the Secretary General on business and human rights has indicated that supply chain labour standards come under the protect, respect and remedy framework that he has outlined for human rights. He noted in a foreword to the 2012 Global Business Initiative on Human Rights State of Play Report that [c]ompanies increasingly make reference to human rights issues in their business operations in due diligence investigations, in contracts with partners, operational guidelines, and reports to investors and other stakeholders. 33 The report notes however, that there is still much work to be done. 33 Global Business Initiative on Human Rights and Institute for Human Rights and Business report (2012) State of Play: The Corporate Responsibility to Respect Human Rights in Business Relationships foreword by John Ruggie, p.1 13

14 Its relevance for charities The good management of labour standards and supply chains can avoid or minimise potential reputational and litigation risks. It is also seen by some as a proxy for good management. This issue may be of particular interest to charities working on issues of human rights, equal opportunities, child welfare and health and safety. Alleged breaches of labour rights in company supply chains tend to be high profile. To mitigate potential financial risk all investors might want to consider ensuring that companies with a high exposure to this area, such as retailers and clothing makers, have properly managed these risks. This issue may be particularly relevant to development and human rights charities, and those working to alleviate poverty in developing countries. How fund managers may incorporate the issue into investments It is possible to assess companies on their labour standards and supply chains. Such information could be used to screen out the worst performing companies, or screen in the best performers. In addition companies can be engaged with to improve their policies and management of such risks. Specific criteria could include evidence of policies, systems and reporting on: maintaining good relations with customers and/or suppliers labour standards in their own operations global supply chain standards It may also be possible to screen out companies which have allegations of breaches of international labour standards in their supply chains and to engage with companies on stakeholder issues. Broader labour and employment issues are also recognised as being fundamental to the financial success of companies. Good management of human capital can result in optimum staff recruitment and retention, greater productivity and an enhanced reputation. Issues and criteria include: treatment of stakeholders, including engagement and relationships equal opportunity and diversity issues job creation and security maintaining good relations with customers and/or suppliers Funds with a labour standards/supply chains screen BlackRock Charifaith CIF CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Fixed Interest Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Investment Fund In addition, the CCLA COIF Charities Ethical Investment Fund, CCLA COIF Charities Fixed Interest Fund, CCLA COIF Charities Global Equity Income Fund, and CCLA COIF Charities Investment Funds will focus on violations of norms and conventions on employment practices in their engagement approach. Failed engagement leads to divestment from Tobacco The issue Tobacco is the largest cause of preventable death in the UK, claiming over 102,000 lives every year. It is responsible for at least 86% 34 of deaths from lung cancer, chronic bronchitis and emphysema, with smokers also doubling their risk of heart disease. Its relevance for charities The significant health impacts of tobacco may be of interest to all charities but will be of most concern to health charities. How fund managers may incorporate the issue into investments It is possible to use negative screens to avoid investing in companies that produce or sell tobacco. It is possible to focus only on tobacco producers, or apply materiality thresholds to exclude only companies that derive a particular proportion of their turnover from tobacco, for example avoiding only companies that derive 33% or above of turnover from tobacco sale or manufacture. It may also be possible to engage with companies on tobacco issues for example in relation to the marketing of tobacco in the UK or developing countries. Funds with tobacco screens Tobacco is at present the most common negative screen employed by charity pooled funds, as was the case when this survey was conducted in global supply chain standards employee relations employee training and development health and safety

15 Responsible Investment in Pooled Funds Baring Targeted Return Fund BlackRock Charifaith CIF BlackRock Charishare Tobacco Restricted Fund Cazenove Equity Income Trust for Charities Cazenove Growth Trust for Charities Cazenove Income Trust for Charities CCLA COIF Charities Fixed Interest Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Investment Fund CCLA COIF Charities Property Fund Epworth Affirmative Equity Fund for Charities Epworth Affirmative Fixed Interest Fund for Charities Epworth Affirmative Corporate Bond Fund for Charities JP Morgan Bond Fund for Charities JP Morgan UK Equity Fund for Charities Lazard Diversified Charity Fund M & G Charibond Common Investment Fund M & G Charifund Newton Global Growth and Income Fund for Charities Ruffer Charity Assets Trust Sarasin Alpha Common Investment Fund for Endowments Sarasin Alpha Common Investment Fund for Income and Reserves Schroder Charity Equity Fund Schroder Charity Fixed Interest Fund The Charities Property Fund 2.5 Alcohol The issue Although alcohol can be consumed without harm, it is also a toxic and addictive substance which causes illness, accidents, violence and family suffering. As evidence of the health risks associated with alcohol consumption becomes more widespread, manufacturers have sought new consumer markets and launched new products. Its relevance for charities Alcohol has been a long-standing concern for some charity investors who are opposed to it upon moral and religious grounds, for example Muslim organisations and some Christian organisations. Health, welfare and social services charities are also often concerned about this issue owing to its health and social effects. How fund managers may incorporate the issue into investments It is possible to apply negative screens in relation to alcohol. This can be focused on companies that manufacture and/or sell alcohol products. A materiality threshold can be applied for example avoiding only companies that derive 33% or above of turnover from alcohol sale or manufacture. It is also possible to engage with companies in relation to issues such as the marketing of alcoholic drinks. Funds with alcohol screens CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Property Fund Epworth Affirmative Equity Fund for Charities Epworth Affirmative Fixed Interest Fund for Charities Epworth Affirmative Corporate Bond Fund for Charities Ruffer Charity Assets Trust Sarasin Alpha Common Investment Fund for Endowments Sarasin Alpha Common Investment Fund for Income and Reserves The Charities Property Fund In addition, all of the CCLA COIF funds will focus on poor sales and marketing practices relating to alcohol in its engagement with companies. This process could lead to exclusion from Gambling The issue With the advent of the National Lottery and the deregulation of the UK gambling industry there have been claims that addiction to gambling is on the increase in the UK. Interest in gambling has been highlighted by recent concerns over the increased accessibility of gambling, particularly through the internet and mobile devices and the increased numbers of women who are gambling. Its relevance for charities Gambling is of concern for charity investors that are opposed to the activity on moral and religious grounds. Social service charities, particularly those dealing with addiction and its social impacts, are also often concerned about gambling. Gambling concern groups, church bodies and the medical profession have criticised the lottery for encouraging compulsive behaviour, greed, poverty and illness. Children s organisations have also been critical of the lottery for encouraging under-age gambling. How fund managers may incorporate the issue into investments It is possible to apply negative screens in relation to gambling, by screening out companies involved in gambling. A materiality threshold can be applied for example avoiding companies that derive 33% of turnover from gambling. This can include companies involved in the National Lottery. It may also be possible to engage with companies for example, to assess how they are addressing issues of under-age gambling. 15

16 Funds with gambling screens CCLA COIF Charities Fixed Interest Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Investment Fund CCLA COIF Charities Property Fund Epworth Affirmative Equity Fund for Charities Epworth Affirmative Fixed Interest Fund for Charities Epworth Affirmative Corporate Bond Fund for Charities Ruffer Charity Assets Trust Sarasin Alpha Common Investment Fund for Endowments Sarasin Alpha Common Investment Fund for Income and Reserves The Charities Property Fund 2.7 Military The issue Military investments can cause concern to charity investors in both absolute and specific ways. Some people share the fundamental conviction that as the taking of human life is wrong, warfare is wrong also. For others, the use of military force is unacceptable when for offensive purposes. For many people, a specific area of concern is the proliferation of weapons in areas of political instability or conflict. In recent years there has been considerable public outcry over landmines and over arms exports to oppressive regimes. Its relevance for charities This issue may be of particular interest to social and religious groups that campaign for arms reduction, or object to arms trading on moral grounds. Other charities may have more specific concerns relating to the sale of specific military products (e.g. landmines or nuclear weapons systems) or exports to oppressive regimes. Investment by charities in arms-exporting companies has been focused on by some campaigning groups. This may make the issue relevant to any charity concerned about potential risks to their reputation. How fund managers may incorporate the issue into investments It is possible to screen out companies involved in military production or sale. The exact criteria used for negative screens can vary. Considerations include: the nature of products or services sold to the military (whether this includes civilian products or services, such as non-combat clothing, accommodation and office facilities) whether the company s products or services constitute all or part of a weapons system or a nuclear weapons system what international military sales activities the company is involved in the proportion of turnover received from military sales It may also be possible to engage with companies on military issues. Funds with a military screen BlackRock Charifaith CIF Blackrock Charishare Tobacco Restricted Fund CCLA COIF Charities Fixed Interest Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Investment Fund CCLA COIF Charities Property Fund Epworth Affirmative Equity Fund for Charities Epworth Affirmative Fixed Interest Fund for Charities Epworth Affirmative Corporate Bond Fund for Charities Lazard Diversified Charity Fund Ruffer Charity Assets Trust Sarasin Alpha Common Investment Fund for Endowments Sarasin Alpha Common Investment Fund for Income and Reserves The Charities Property Fund 2.8 Pornography The issue Current opponents of pornography argue that it is degrading to both men and women, transmitting the message that women are sex objects available solely for male gratification without any form of emotional attachment. There has been rising public concern recently about internet pornography, about children using the internet and accessing offensive material, and the dangers posed by wi-fi access in public places with no firewalls for hard porn content. Its relevance for charities Religious organisations and charities working on social welfare issues may find this issue of concern. How fund managers may incorporate the issue into investments It is possible to use negative screens to avoid investing in companies involved in pornography or adult entertainment services. Negative screens or engagement activity could focus on companies which: publish or wholesale pornographic magazines or newspapers distribute cut 18 certificate films or videos 16

17 Responsible Investment in Pooled Funds provide adult entertainment services (such as adult entertainment TV programmes or channels, tabledancing or lap-dancing, and sex shops) distribute pornographic material (e.g. via mobile phones) Funds with a pornography screen Baring Targeted Return Fund BlackRock Charifaith CIF CCLA COIF Charities Fixed Interest Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Investment Fund CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Property Fund Epworth Affirmative Equity Fund for Charities Epworth Affirmative Fixed Interest Fund for Charities Epworth Affirmative Corporate Bond Fund for Charities Ruffer Charity Assets Trust Sarasin Alpha Common Investment Fund for Endowments Sarasin Alpha Common Investment Fund for Income and Reserves The Charities Property Fund 2.9 Animal Testing The issue Animal welfare organisations have long campaigned against the use of laboratory animals to test the toxicity of chemicals in consumer products, such as toiletries and cosmetics, tobacco and household cleaning products. The European Union agreed to ban most cosmetic tests from 2009 including, importantly, a ban on import into the EU of cosmetics with ingredients tested on animals - so that the problem is not simply exported outside the EU. The animal testing of all new chemicals (not just those used in cosmetics) accounts for many more procedures - these tests include pesticides, food additives and preservatives. However, fundamental biological research and drug research and development account for the largest proportion of animal testing procedures. Most testing occurs at the development rather than the research stage. By law, before new drugs can be tested on humans they have to be tested on two species to test the whole body effect. Its relevance for charities This issue will be of particular concern to animal welfare charities How fund managers may incorporate the issue into investments It is possible to apply negative screens in relation to animal testing, for example screening out companies which provide animal testing services have tested cosmetic products or their ingredients on animals in recent years have tested cosmetic products or their ingredients on animals in line with a fixed cut-off date policy have tested medicines on animals in recent years have tested other products on animals in recent years There are currently no funds with an animal testing screen Corporate Governance The Issue Corporate governance is the direction and control of an organisation for the benefit of its stakeholders. 35 There are a range of factors involved with maintaining effective corporate governance, including: separate Chairman and Chief Executive, with a balance of executive and independent non-executive directors strong, independent and transparent audit and remuneration committees and an annual evaluation by the Board of its performance effective rights for shareholders, who are encouraged to engage with the companies in which they invest issues surrounding bribery and corrupt practices (and the legal implications of these practices) overall ESG risk management approach equal opportunities and women at board level are areas of legal, moral or societal concern. In the UK, the Financial Reporting Council regulates corporate governance through the Corporate Governance Code, which operates on the basis of a comply or explain principle. 36 Corporate governance appears likely to become an increasingly important issue in the coming years. The 2012 merger between Glencore-Xstrata can serve as an example. Institutional shareholders blocked several early attempts at a merger based on share valuation and executive remuneration packages included in the merger. Both companies share prices suffered during this period of instability

18 Its relevance for charities Good corporate governance should be a concern for any investor. A recent study by Deutsche Bank Climate Change Advisors, which compared over one hundred academic reports, suggests that good governance is a key factor in effecting the ability of a company or investment to outperform the market. 38 Issues such as executive pay, the reputation of the Board and shareholder relations can all impact the performance of a company and is shares. Legal issues surrounding bribery and corruption may further impact on a company s performance and value. Some of the fund managers contacted have enunciated a specific policy regarding corporate governance. All trustees and fund managers should consider good corporate governance structures, and charity trustees may wish to ask their fund managers for further information regarding the governance of both the fund and the corporate governance of any investments held. How fund managers may incorporate the issue into investments Fund managers may utilise a range of tools to manage this issue. They may: have a specific policy regarding corporate governance employ a third party research body or a voting proxy to advise on corporate governance issues choose to tackle the issue on a case by case basis utilise voting and engagement policies to influence corporate behaviour: for example, voting against excessive executive remuneration. All in all, whilst financial performance may indicate a well governed company, other issues, as noted above, may also have to be considered. Funds with a corporate governance approach Aberdeen Charity Select Global (ex Uk) Equity Fund Aberdeen Charity Select UK Bond Fund Aberdeen Charity Select UK Equity Fund Baring Targeted Return Fund Blackrock Charitrak CIF Blackrock Armed Forces CIF BlackRock Charifaith CIF BlackRock Charinco CIF BlackRock Charishare CIF BlackRock Charishare Tobacco Restricted Fund CAF UK Equitrack Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Investment Fund CCLA COIF Charities Ethical Investment Fund Cazenove Equity Income Trust for Charities Cazenove Growth Trust for Charities Cazenove Income Trust for Charities Cazenove Multi Strategy Property Trust for Charities Epworth Affirmative Corporate Bond Fund for Charities Epworth Affirmative Equity Fund for Charities Epworth Affirmative Fixed Interest Fund for Charities Lazard Diversified Charity Fund M&G Charibond M&G Charifund National Association of Almshouses CIF Newton Global Growth and Income Fund for Charities RCM Chariguard Overseas Equity Fund RCM Chariguard Fixed Interest Fund RCM Chariguard UK Equity Fund Ruffer Charity Assets Trust Sarasin Alpha Common Investment Fund for Endowments Sarasin Alpha Common Investment Fund for Income and Reserves Schroder Charity Equity Fund Schroder Charity Fixed Interest Fund Schroder Charity Multi Asset Fund Many of the funds we contacted for this report had no specific criteria for corporate governance relating to a specific fund, though the fund management as a whole had a policy regarding corporate governance that applied to all their funds. This often involves assessments of companies corporate governance, against a varied range of criteria, from environmental and social concerns to executive pay and corporate structure. As with other areas, policies regarding corporate governance vary widely across fund managers. Trustees should consult fund literature or engage with managers on specific policies. 38 Fulton, M., Kahn B. M. & Sharples C, (2012) Sustainable Investing: establishing Long-Term Value and Performance 18

19 Responsible Investment in Pooled Funds 3 RESPONSIBLE INVESTMENT STRATEGIES 3.1 Negative screens Negative screens are a popular responsible investment strategy for pooled funds. By far the most common negative screen deployed by the pooled funds included in our survey is tobacco. Tobacco is screened out by twenty six funds. Sixteen of these funds go beyond this to employ other negative screens. Here the focus tends to be on sin stocks such as alcohol, gambling and pornography as well as armaments. The following funds employ one or more negative screens (details of their policies can be found in the Appendix): Baring Targeted Return Fund BlackRock Charifaith CIF BlackRock Charishare Tobacco Restricted Baring Targeted Return Fund Cazenove Equity Income Trust for Charities Cazenove Growth Trust for Charities Cazenove Income Trust for Charities CCLA COIF Charities Ethical Investment Fund CCLA COIF Charities Investment Fund CCLA COIF Charities Fixed Interest Fund CCLA COIF Charities Global Equity Income Fund CCLA COIF Charities Property Fund Epworth Affirmative Equity Fund for Charities Epworth Affirmative Fixed Interest Fund for Charities Epworth Affirmative Corporate Bond Fund for Charities Lazard Diversified Charity Fund M & G Charibond Common Investment Fund M & G Charifund National Association of Almshouses CIF Newton Global Growth and Income Fund for Charities Ruffer Charity Assets Trust Sarasin Alpha Common Investment Fund for Endowments Sarasin Alpha Common Investment Fund for Income and Reserves Schroder Charity Equity Fund Schroder Charity Fixed Interest Fund Cordea Savills: The Charities Property Fund 3.2 Positive screens Positive screens are only employed by a handful of funds. For example: the CCLA COIF Charities Ethical Investment and COIF Charities Investment Funds will make appropriate high impact investments. In the past this has included investment in microfinance, timber and immunization bonds. There therefore remains a lot of scope for a greater focus on positive screens, thematic investments and missionrelated issues. 3.3 Engagement and voting All funds, including tracker funds, are able to engage with companies on ESG and ethical concerns. The influence that an individual charity is able to have on the engagement approach of a pooled fund may be limited. Trustees may therefore wish to consider the engagement approach of a fund before deciding to invest. Engagement can take many forms. A fund manager may choose to exercise the right to vote as a shareholder, often at AGMs. Fund managers may seek dialogue with companies boards on an ongoing, or case-specific issue. They may also use public statements to criticise a board or company where it is felt that an area of ESG or responsible investment is not being addressed. Engagement and voting can be important tools for fund managers. They can be used to ensure that the concerns of both the fund manager and client regarding ESG and responsible investment are not breached by investee companies. Charity trustees may wish to further examine the details of their fund managers engagement and voting policies, and to engage with their fund managers to ensure these policies meet their needs. At its best, engagement with companies on ESG issues can drive innovation, increase efficiency, mitigate risk and encourage more responsible action in ways that protect or enhance shareholder value. With clear objectives, a careful choice of companies, and a focus on the right methods, much can be achieved. A fund s engagement policy is often in line with the engagement policy of the fund manager across all of the funds that they manage. Some fund managers may be more inclined to consult with clients about their engagement policy. Fund managers may publish engagement reports and provide details to their investors of their voting record and of any meetings with companies. If such reports are not available, trustees may wish to encourage fund managers to be more transparent about their engagement activities. 19

20 Some fund managers focus on corporate governance issues around the management company (such as directors remuneration, separation of chair and chief executive functions, non-executive directors and audit committees) whereas others include an assessment of other ESG and ethical factors in their engagement approach. It could be argued that a proper understanding of corporate governance logically leads to a broader appreciation of risk management that incorporates environmental and social issues as well as corporate governance, and therefore these engagement priorities are linked. The engagement and voting policies of funds can vary greatly. The following fund managers provided details of the engagement and voting policies in relation to ESG or ethical issues that apply to their charity funds. Unless otherwise stated, these approaches to engagement and voting cover all the funds listed in this report that are provided by the fund management body, and also cover all of the asset management companies investments. To give a sense of current approaches, below is a synopsis of the responses, rather than an interpretation: > ABERDEEN ASSET MANAGEMENT Aberdeen states that it engages with all the companies in which it invests on ESG matters. Engagement with companies on ESG and other, more traditional SRI topics is a fundamental part of its business. Aberdeen states that it has engaged companies on SRI issues for a number of years in conjunction with managing traditional SRI funds. Aberdeen also engages with companies on wider ESG matters as it sees these extra-financial topics as critical to understanding the whole picture of the companies in which it invests. > BARING ASSET MANAGEMENT Barings believes it is in the interest of clients to develop and maintain a purposeful dialogue with companies on strategy, performance and the management of risk. For equities and sub-investment grade corporate bonds, its analysts assess corporate governance and social and environmental factors prior to investing. This means that they tend not to invest in companies where they consider corporate governance is poor. When assessing corporate governance or social or environment factors for companies prior to investing, they will hold them to local standards. Barings do not believe it is appropriate to impose a particular set of cultural values on companies indeed they believe that trying to do so could make it more difficult to engage effectively with them. Barings aim to meet most companies they invest in on a regular basis. They recognise the importance of corporate governance by taking advice from a provider of corporate governance solutions. In the absence of an instruction from a client, they will request a recommendation on proxy votes from that third party. By utilising this third party provider, they monitor the resolutions put forward at annual and extraordinary meetings. Barings review their research and where they deem it to be in the interests of their clients, vote with their recommendations. They vote against management resolutions where they believe it is right to do so in the interest of their clients. > BLACKROCK BlackRock states that it believes good corporate governance, including social, ethical and environmental (SEE) factors, can protect and enhance long-term shareholder value. As a fiduciary, BlackRock monitors companies performance on SEE matters, as with other operational factors underpinning financial performance. Concerns are communicated through engagement, either by way of voting at shareholder meetings or direct contact with management or boards. Blackrock s voting decisions are based on achieving the outcome that it believes would be in the best economic interests of long-term shareholders (i.e. BlackRock s clients). Blackrock s voting records are published annually on its website, as are its global and regional voting policies. In addition, BlackRock s Corporate Governance and Responsible Investment (CGRI) team, consisting of 20 professionals, is responsible for encouraging sound corporate governance practices at the companies in which BlackRock invests on behalf of clients. >CAZENOVE CAPITAL MANAGEMENT If its assessment indicates that a company s approach to social, environmental and ethical (SEE) issues could have an adverse impact on shareholder value, Cazenove Capital states it will try to reduce this risk. Cazenove Capital says it highlights its assessment of the SEE risks to the company in bespoke meetings/ conference calls and aims to promote best practice. If this dialogue proves futile and the risk increases, as a last resort Cazenove Capital may sell its holding. In terms of voting, Cazenove Capital states that in deciding upon its position on such matters as remuneration, incentives and board structure, the general aim is to promote best practice, but Cazenove Capital recognises that a precise set of rules cannot fit every company s circumstances and Cazenove Capital wishes to be flexible. In deciding upon best practice, Cazenove Capital follow closely the guidelines issued by the Association of British Insurers ( ABI ) and the principles of the Combined Code but does not feel bound to follow the recommendations of any particular body when Cazenove Capital feels that either a stricter or a lighter touch is appropriate. Cazenove Capital strongly supports the principle of pre-emption rights to protect clients interests in companies from dilution. 20